The banking crisis of 2023 forced a reckoning among policymakers about longstanding assumptions around bank stability, the role of deposit insurance and social media in bank runs, the return of interest rate risk and the looming specter of Too Big to Fail. One year later, some of those questions have been resolved while others have gone dormant, much of the banking industry's attention has shifted to opposing proposed bank capital rules. So was the crisis just a blip, or did it illustrate important and unresolved questions about the stability of the banking system? Join Wharton Business School professor and financial historian Peter Conti-Brown and Washington Bureau Chief John Heltman as they discuss how those debates have evolved and advanced in the year since the failures of Silicon Valley Bank, Signature Bank and First Republic.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
John Heltman (00:10):
Good afternoon everybody and welcome to Leaders. I'm John Heltman, Washington Bureau of Chief for American Banker. And just about a year ago, the financial world was taken by surprise when Silicon Valley Bank and Signature Bank teetered and then failed with regulators invoking the systemic risk exception to cover billions of dollars in uninsured deposits at those two banks. A few weeks later, First Republic was sold in a quasi brokered failure and sale to JP Morgan Chase, ending the near term crisis in confidence in the banking system, but beginning an important policy debate what went wrong and what must be done to fix it. To talk about that debate, how it has evolved and where it is going is Peter Conti-Brown, Associate Professor of financial regulation at the University of Pennsylvania's Wharton School. Peter, thanks for joining us.
Peter Conti-Brown (00:57):
Delight to be with you John.
John Heltman (00:59):
Alright, so let's start at the beginning. What did the '23 mini banking, quasi banking crisis bring to light? What were the issues that we now are our debate is circling around?
Peter Conti-Brown (01:17):
Well, I think that's a hard question because of the second part that our debate is now swirling around. The first part is more,
John Heltman (01:25):
I don't bring any softballs here.
Peter Conti-Brown (01:27):
What's that?
John Heltman (01:28):
I don't bring any softballs.
Peter Conti-Brown (01:30):
Well, here's let me hit the first softball and then I'm going to try my attempt at your knuckle ball. So what did we learn from the 2023 crisis as it was unrolling? It was in some senses the fun house mirror version of the 2008 financial crisis. It was a banking crisis like in 2008 like we've seen many other times before. In this sense, banks that fail tend to fail in a pretty similar kind of way slowly than very, very quickly. But the Funhouse mere version of it is that rather than having banks that had taken extremely exotic risks in the production and purchase of assets, the values of which could not be discerned here, we had a bank that had taken a very different kind of risk by buying an awful lot of pretty plain vanilla assets. And in 2021 and two, as the Federal Reserve started to make peace with the fact that we had a bit of an inflationary problem, partially of its own making, there was a critical window where the Fed had opened itself up to the purchase large scale asset purchase of some of these very same plain vanilla assets, while also signaling that there was a pretty quick rate hike to follow of the 10,000 depository institutions throughout the United States, 4,000, which are banks, nearly all of them during that critical window resolved this specific kind of risk and that is if you keep all of your assets paying out interest rates that were attractive in 2020 and then your liabilities start to require payments that are higher than that in '21 and '22, then you are no longer going to be able to finance the business in banking.
(03:25)
Nearly everybody got that right. SVB got that spectacularly wrong and that fact that banks can fail doing things that look in one way to be quite prudent was not any surprise to bank supervisors or to bankers. Again, the overwhelming majority of bankers were pretty keyed into this dynamic, but it was a surprise to the rest of us to recognize that a bank as big as Silicon Valley Bank could get this basic fundamental issue in the business of banking. So catastrophically wrong.
John Heltman (03:57):
Just while we're there, how were the experiences of Silicon Valley Bank, signature Bank and First Republic distinct? Because obviously they're all similar in that they all ceased to be banks and or lumped together, but did they all make the same mistake or are there kind of shades of gray within that mistake?
Peter Conti-Brown (04:22):
I would say they were all in a broad category. They'd made similar kinds of mistakes. They were exposed to duration risk in similar kinds of ways by pursuing different kinds of assets. I think on the asset side of the balance sheet, we have the similar phenomenon that their inability to generate net interest income in an interest rate environment where the Fed is raising interest rates quite quickly, but they had legacy assets that were below that threshold that was similar for all three. The problem that that presents is that as banks need to liquidate their assets to match redemptions, the deposit withdrawals that all three banks face, they're unable to do so. There's no market for their assets. So that was similar, but each one has its particular idiosyncrasies leading up to those decisions. The decisions that First Republic made in catering to a wealthier clientele adding to more services, inflected banking products and experience pulled in an awful lot of opportunities both in the liability and on the asset side and allowing it to grow really quickly.
(05:36)
Silicon Valley Bank is sort of the ambitious banker wanting to be much more than that Paragon. As you look at the holding company of Silicon Valley Bank of Silicon Valley holding company, looking at all the different activities in which it was engaged, it was so clear that the senior management team wanted to be not only a part of the Silicon Valley ecosystem, but a dominant part of that ecosystem. They didn't want to be the banker to Silicon Valley, they wanted to be part of Silicon Valley. And so that kind of exposure led to other kinds of problems and signature made a really big bet on a specific kind of asset class moving from taxi medallions to crypto, but in a sense just take one step back and they look pretty similar to each other
John Heltman (06:28):
Now as often happens in a crisis in the heat of it, there's a lot of talk in Congress and by lawmakers about things that we ought to do. I think the positive insurance reform was a hot ticket for a second. I think executive compensation was another one that resurfaced from deep cold storage to present itself. Once again, we don't hear as much from Congress is that just oftentimes Congress will come in and be like, we should do this, and then a crisis kind of peters out and then their interest also kind of peters out. Is there anything that Congress still has left to do? Is there anything that's still undone that's kind of squarely in their lane?
Peter Conti-Brown (07:16):
Yeah, a lot there. Let's unpack it with a colleague, Michael Ohlrogge at NYU. I've done some work that tried to assess what motivates Congress to pass financial legislation, both banking and in the capital markets. And the prevailing theory is that a banking crisis prompts Congress to act. We actually found zero evidence for that, that congress passes major pieces of banking legislation in periods where there's no crisis in sight. There are obvious exceptions to that. Dodd-Frank is a big one. The New Deal legislation that followed the banking crisis in 1933, lots of exceptions that we can think of, but we over anchor those. So it's not surprising to me at all that Congress did nothing in response to the March, 2023 crisis. I would've been very surprised indeed if they had done something. The two issues that you mentioned though are not simply pulling policy ideas off the shelf and having big debates.
(08:15)
They have something in common and that is that stakeholders in the Silicon Valley bank ecosystem and for Republican signature to lesser degrees were bailed out by the government. Uninsured depositors received benefits to which they were not legally entitled. They made choices including some very prominent companies like Roku and Circle where they just piled risk into a single institution and rather than, and realizing the upside of that risk while the getting was good and then they socialized that downside and people were very upset about this for good reason. And the other bailouts that occurred were the managers of Silicon Valley Bank that rode high and proud during the good times, monetizing their relationships and their employment and there was no claw back. They don't have to give that money back. They got fired at the end, some of them. But that left this sense that wait, while the getting was good, you got the good and when things went bad, all the rest of us were left holding the bill and the shareholders were wiped out in a sense, not allowed the Biden administration to say that it wasn't a bailout, but that doesn't get to the fact that those uninsured depositors were made whole.
(09:29)
Right. And those executives got to cash fast checks along the way. And so the original debate was this has got to be a policy failure. It can't be the case that we're opening up the public goal for very wealthy people and institutions because things didn't quite break their way when they took some big gambles. And so most of the debate was around that. Some of it was really thoughtful, not just about punishing bad guys or making sure that we don't have that asymmetry. The debate around deposit insurance I thought was really interesting. We had some folks, people like Legal Scholars, Morgan Ricks and Lev Menand who said, let's just stop this whole game of having uninsured depositors. Let's pile everything into the banking sector, ensure it all, and that'll solve a lot of problems. I took a very different view. I thought that and still think that it is something that is very healthy, very important for us to have a variety of different financial institutions participating in the ecosystem serving various needs. And that what we need to do is have regulators, bankers, supervisors, more committed to the idea that there can be private risk taking in finance in America. But that debate, as you said, that's kind of done. That's old news. Nobody's pursuing that Further, there are a lot of hearings on both of these issues, but that's mostly receded and for all kinds of reasons, not least because congress, banks, regulators, supervisors in Q1 2024 we're off to different things.
John Heltman (11:10):
Just while we're on the subject of the systemic risk exception and that call to insure uninsured depositors in hindsight, which of course is always sharper than when you're in the moment, was that the right choice? Do you think that regulators made the right call, which was a pretty widely within the regulatory community, which contains of course Democrats and Republicans sitting on that board on those boards I should say, all kind of agreed with it at the time. Is there another way they could have gone you think?
Peter Conti-Brown (11:50):
I think so. The counterfactual is tricky because what we have to be asking ourselves is in the event of rapid failure of Silicon Valley Bank that couldn't have been done through the Dodd-Frank process. This is title two of Dodd-Frank. We created this whole bankruptcy alternative called orderly liquidation for which SVB would've qualified. We avoided it through the systemic risk exception. So the counterfactual is if we had allowed that to happen, so not just messy bankruptcy of the holding company and liquidation by the FDIC and the traditional way of the state, the California bank, the question is if in the orderly liquidation would we have seen a systemic run on those other 4,000 banks and 10,000 altogether depository institutions? Now the regulators, as you said, this was not a partisan move. This was the Biden administration trying to win elections for Democrats. This was a bipartisan sensibility coming out of the regulators.
(12:54)
They felt that this was a Lehman like moment that they got Lehman wrong in September, 2008 and we couldn't do it again. We had to have not an orderly liquidation, we had to have a bailout or quasi bailout. And that tells us one of two things. Number one is that 15 years after we had this big and mighty crisis and debate about how we could create a more resilient system so that these kinds of bailouts didn't happen again, we do not have a resilient financial system. The failure of a single bank, even a big one, would be enough to topple our entire system during a time of economic expansion. And the thing that would topple it all is the fact that they had overinvested in plain vanilla assets. That's a really disturbing thought that speaks to a kind of financial fragility that makes us think that we have to totally throw out everything we've understood about banking and start from scratch.
(13:50)
Some people take exactly that view. The alternative view is the one that I'm more persuaded by and that is regulators are trigger happy. They do not like the idea of waiting and watching and watching. That's symmetric realization of upside and downside risk wrinkle through the system and ripple through the system. And I think that that is lamentable. I think that we should stop having a single failure of a bank be a push notification from the Wall Street Journal or Bloomberg or whatever. I think we should not consider a bank failure, a policy failure. We need to have a lot more enthusiasm even for risk taking such that bank failures occur in the normal course of business and do not occasion us to have a declaration of banking crisis. And I think that's the concern that I have, but one of those two things is true. It's not a third thing either. Our system is rotten to the core and we didn't do anything to meaningfully restore it in 2010 or our regulators don't have confidence in the good things that were done in 2010. And neither is a very good way to describe the financial system and its supervision.
John Heltman (15:08):
And since we're second guessing our public officials, again, a lot of the debate in the tail end of this crisis, at least the political debate has been around the shortcomings at the Fed and among other regulators about were they asleep at the wheel? Right? This obviously didn't happen overnight. It wasn't a secret. They have access to knowing what these banks were doing in the lead up to their failure. Should they have done more sooner should they have seen this coming? What's your view?
Peter Conti-Brown (15:47):
I cut bank supervisors a huge amount of slack more even than the Fed has done for its own supervisors in part because what we don't know, so again, I'm going to come back to the same statistic. There was a paper written in March or April, 2023 based on some novel data. I'm blanking on the author's name, I think it was Amit Seru, but they basically said, I think we've got about a number was between 300 and 400 banks that have similar duration risks, similar kinds of exposures just like SVB. And the way that that headline went just viral and banging around discussion made it seem like, oh my gosh, we're going to see 400 more bank failures. This is awful. And the way that I read it, it was like, hang on just a second. Out of 10,000 institutions in a period of generational interest hikes, only 300 to 400 of them have this kind of duration risk that strikes me as an incredible success and it's a success that I would attribute to both bankers and supervisors because John, here's what we don't know.
(16:57)
We don't know how many supervisors or sitting with their bankers and saying, listen, the Fed has signaled it's about to raise interest rates, but its doors are still open to sell these assets. You got to get out of this duration risk. You got to figure out net interest margin prospectively. What's your strategy? And we don't know how many banks heard that conversation, figured it out, pivoted, went in a different direction. That leads to a truth about bank supervision that is very lamentable, but is the system we have and that is failures appear to be very public and crystal clear and their successes are always secret. And so I think when I read the fed's postmortem on bank supervision, the OIG report on supervision, they kept on saying, see, the supervisors had flagged these kinds of issues, but they didn't do anything about it. And I think that fundamentally misapprehends the nature of bank supervision flagging the issue is doing something about it and the number of banks that responded to those flags is secret.
(18:04)
We don't know, but it's not zero. The thing that people on the left and right criticize is that they didn't do more about it. They didn't flip over the supervisory process into a litigation and enforcement process. And I think that we should be extremely wary of eliminating the nuance and flexibility of bank supervision and turning it into more of a litigation posture. I don't think that's good for banks. I don't think that's good for bank stakeholders including customers. I don't think it's good for the regulators. I think having the give and take this negotiated space of bank supervision is unusual and it's unusually useful and making sure that there are always lawyers in the room would fundamentally change it. But that's what it means when people say they should have done more, they should have seen this issue and they should have sued through enforcement. Then they're saying that every time they throw a flag, lawyers on both sides are going to ante up. And the thing that my fellow lawyers are very good at is just slowing stuff down. That's not going to be faster. It's going to be generically. And so I'm extremely skeptical of placing this crisis at the feet of bank supervisors.
John Heltman (19:24):
One of the sort of things that, speaking of postmortem flags on the play, one of the things that kind of came to light was problems with accessing the discount window. Of course, I believe it was SVB and signature both were really not in a position to avail themselves at the discount window that we learned later. And while we're talking about liquidity, not a bank failure, but the sort of wind down of Silver Gate Bank just ahead of these issues at SVB, I think brought new attention to the home loan banks and their role in providing routine liquidity to the banking system. How has the conversation around bank liquidity been informed by this crisis? And then I guess what would a sort of more ideal bank liquidity structure kind of look like? I mean, do we know and what ought to be the role of the discount window vis-a-vis the home loan bank, the advances in a more ideal world?
Peter Conti-Brown (20:38):
Alright, John pitchers usually just throw one ball at the batter at a time. Many
John Heltman (20:46):
Before I forgot,
Peter Conti-Brown (20:46):
Sorry. I want to just mention some footnotes to my conversation, to our listeners who can follow along some really phenomenal work done by Kate Judge at Columbia Law School on the Home loan bank. She's been tracking this issue for many, many years and recently testified before Congress with important recommendations. The other two folks that I think are, I learned from them every time I engage with them are Bill Nelson at BPI and Steve Kelly at the Yale program on financial stability both on bank liquidity. I've learned a ton from them and have my own views, so let me share my own views, but recommending to our listeners that they check out those three of my colleagues, I think that the public statement that bothered me the most after SVB and there were many was in the first FOMC presser with Jay Powell when he was asked by a journalist, Hey, why did you all declare a banking crisis, right, rather than just use the discount window.
(21:54)
I thought that was a phenomenal question. I forgot who asked it, but it sounds kind of technical and legalistic. The section of the Federal Reserve Act that allows the Fed to lend constantly through to banks is called Section 10 B. You don't declare a bank emergency. It's just this is what the Federal Reserve was set up to do, right, is to lend to banks the section that it did invoke, which 13 three, the infamous right? This is the thing that we saw come to life in 2008 and again in 2020. I think about that for a minute. The last three presidents, we have to go back to George W. Bush before we have a president who did not see the Federal Reserve declare a bank emergency, a bank crisis. And so j Powell said, oh, there's no special magic in that. It was just kind of what we wanted to do.
(22:41)
Special magic was the quote, I'm paraphrasing the rest, but I hated that response because it matters enormously whether the Fed says that we do not have the tools to respond to liquidity constraints in the banking sector without declaring that we are in unusual and exigent circumstances, which is the statutory language. And I would regard this as an admission of a policy failure. The policy failure here is that they have not been using the discount window. Well, and there are a couple of issues here. You flagged both of them. The first is they have been actively over the last 20 years, they've been actively discouraging use of the discount window, including in liquidity planning. So a bank as it's thinking through as a must do by law, what are my contingencies right now? If we needed to borrow quickly, who would we borrow from? The supervisors oversee that process, that planning process, and it was real that a lot of bank examiners, bank supervisors were saying, Hey, I see you've written the discount window on your liquidity contingency plan.
(23:45)
You got to take that out and find somebody else. And that creates a stigma that is coming. There are various other aspects of that stigmatization and all of them meant that the banks were seeking other sources of liquidity. And the federal home loan banks, which are quasi-private institutions, effectively private, have just monetized their liquidity provision alternative six ways to Sunday. And that created a ballooning of the Federal Home loan bank system. It created the substitution of the federal home loan bank system and banks that had nothing to do with home loans, right? The original purpose creation of that system. And then it created a traffic jam because the Federal Home Loan Bank system and the Federal Reserve system, each had to have identified collateral and liens on that collateral in order to engage in this lending. So just a total mess. I have not been persuaded that federal home loan banks serve any meaningful useful purpose in 2024, if I'm honest.
(24:50)
I know that's going to offend a lot of people who are pretty invested in that system. I'm enough of a historian to know that we don't eliminate institutions as deeply embedded into the system with a stroke of a pen. But I would be in favor of just about any regulation or legal change you could imagine. So to dramatically narrow their field of play, because I think it only ends in tiers. And I would also favor something that the comp control of the currency, Mike Sue and Michael Barr and Mickey Bowman, these are all some of the regulators who are focused on these issues that all agree our management of the discount window in America is just a hot mess and it's got to be changed. There's some easy changes that we can make and some harder changes. And I think all of them are on the table.
(25:39)
And I think that's one area coming out of 2023 where all of us on a bipartisan basis looking at this have said, whatever it is that we need from the discount window, it is not what we have. And so there are some changes I think that we should see and we will see there, but the failure to prepare a discount window for its basic function was a major contributor to the 2023 crisis. And certainly where it limited or didn't functionally or legally the Federal Reserve's freedom of action, I think that was a really relevant part of the story and not a good one.
John Heltman (26:17):
The other broad topic that has emerged as a point of contention is bank capital with the issuance of the Basel three endgame proposal last July, significant hikes in capital for the biggest banks. This was sort of painted, I believe it's fair to say this was painted at least in part or at least as a partial response to the banking crisis. And I think people tend to think of capital as a more capital means safer bank shorthand. And so if more capital means that SUB wouldn't have failed, right? Is that the appropriate place for us to be? Is that the right way to think about this? And what is the role of bank capital? And while we're at it, there's also, as one of our listeners has pointed out, there's a lot of leverage, difficult leverage in the banking system, which of course affects capital. Where is this conversation going and where audit to be going?
Peter Conti-Brown (27:25):
I'm very skeptical about the debates that we're having right now about Basel three have anything to do with March, 2023. I'm skeptical of this because before, after the election 2016, when Republicans took over and their preferred candidates started occupying these big chairs, they were focused on capital appropriately. So after the 2020 election with a lag, quite a significant lag in installing the Biden team's preferred regulators, they were already focused on capital 2023 comes along. It's not obvious that a better capitalized SVB would've survived this. It was a fire sale on their assets of such spectacular degree. Bank capital's, no mystery to, it's just the equity, it's just the residual ownership that gives it it's market cap. It's the funding stream through the capital markets versus other sources of the equity capital markets. That's one of the reasons why I hate the term bank capital. It's historic in nature, but it's extremely confusing.
(28:34)
So it's just about how well capitalized, how large the equity participation is on the bank's balance sheet. And when you have a fire sale on all of the assets and the liabilities are all redeemed simultaneously, it doesn't matter how capitalized you are unless you have no liabilities, but then you're not a bank. And so I don't think that that would've been it. That said, it is extremely appropriate for the 2020 election to have consequences. And one of the big consequences are the Democrats in 2024 and Republicans in 2024 see the risks that in here in equity levels differently. The Republicans today, by and large, not everywhere, but by and large see a deference to banks to set their own capital levels as a more desirable outcome because it results in they would say more lending, more economic growth, more innovation. Democrats by and large, not exclusively, but by and large, see the benefits of higher equity levels.
(29:42)
So demanding more capital market participation in banks is creating both idiosyncratic and systemic resilience. John, I mean, there's no one we can call that get the right answer there with the appropriate level. This is not just a line drawing problem, but it's a valued judgment. And we have never done better than Winston Churchill in saying that Democratic elections determining to paraphrase him, bank capital is about the worst way you could go about this except for everything else that has ever been tried. And so the fact that we are seeing a big debate here I think is really healthy. What I don't like about it is the idea now that after Republicans had their turn to adjust the dial of risk appropriately following the 2016 election, that Democrats are suddenly behaving an illegality or playing politics or what have you. And so I've been troubled in fact, by the tenor of the debates around Basel three, and my thought is, if you don't like the way that the Democrats are setting bank capital, then there's a presidential election on you should vote for somebody else. That's my thought.
John Heltman (30:58):
We're getting close to the end here, but in crises these, there's a tendency to, 2008 maybe isn't a great analogy because that was, we're talking about a different order of magnitude, but there's the sort political wave tends to work. There's a big problem, everyone's focused on it, something kind of comes out of it. And then some things end up hitting the cutting room floor and taking that kind of premise. What do you think would be the sort of logical policy? What are the likely policy outcomes of this experience with SVB signature First Republic? What are they likely to be? And just because I like throwing more than one ball at you at the same time, what, what's going to be left on the cutting room floor? What's the work that's going to be left undone in the sort of next say three to five years? That's
Peter Conti-Brown (31:57):
Great. I feel like I'm in one of those 1980s movies where somebody's at a batting cage and a misfires and all of a sudden there are 2020 balls coming.
(32:09)
But I love each one of these questions are thrown my way, John. So I think that to come back to a question we discussed, the thing that has made me most optimistic about regulatory change following SVB at all is the adjustments of the discount window. There's no passage of legislation that has to occur. Stigma around the discount window is a policy choice. The Fed has made it many, many times, it can unmake it and it looks like it is trying to unmake it. There's some tensions there, right? If you continue to say that liquidity requirements for banks cannot include discount window availability, that's only special. That's only as a last resort that is the stigma. So you got to balance those kinds of questions. So there's real work to be done, but I see some really responsive engagement. I also think that we are going to see some finalization of Basel three endgame. It's going through a political process. Jay Powell just weighed in on it last week, and he thinks that the consensus will be broad and deep.
(33:28)
And I think that is going to be, again, I don't think it's in direct reaction to 2023 was certainly the question and its priority of a well-capitalized banking system is something we'd be focused on. The things that we're leaving for another day are the two that we identified. So the first is, do we need a different deposit insurance regime than we have? Should we be making adjustments with respect to its pricing, its availability. One place of general consensus between people who disagree quite a lot is it does not make sense to treat a savings account of a wealthy individual or company identically to a transaction account that's meant for meeting payroll. The insurance dynamics there should not be the same. They're not the same in other jurisdictions like Japan. They shouldn't be the same here. We're not going to get to that, and I think that's going to be something that we should get to later.
(34:26)
The other thing is that appropriate conceptualization of bank supervision with my co-author, Sean Bonta, we've just finally submitted to a publisher book we've been working on for many years. It's the history of bank supervision in the United States. And there we talk about bank supervision as being an adjudicative space, a space where people get to banks and the government get to fight it out about the appropriate line in risk management between public and private. And I think that obviously, I think that's correct, but I also think that we're having a big debate about that right now. What is the appropriate line for that kind of risk taking? And I think that's going to continue and it's going to be deeply inflected with the lessons from SVB.
John Heltman (35:09):
Just one last one from the audience, what could have been a kind of early warning indicator for S SUV v's signature for say, the Fed? Is there some sort of red line that might be presented that says, okay, now you got to do something? Maybe it's not an enforcement action necessarily, but is there some kind of a trip wire that maybe we can turn to in the future?
Peter Conti-Brown (35:39):
After the savings and loan crisis, Congress did change the law in what's called the Federal Deposit Insurance Improvement Act or fi, federal Deposit Insurance Corporation Improvement Act. That created a concept called prompt corrective action. And prompt corrective action is supposed to be that trip wire, all kinds of discretionary judgements about that, but some of 'em have to do with capital and other issues as well that did not stick. We don't see a lot of that kind of, these trip wires working. And I am going to go ahead and I know that this is not popular. I'm in the minority here. Why do we need tripwires? Why can't bank failures just be a thing that we enjoy even? I mean, it sucks to be the stakeholders of the bank who have to face the downside risk. I don't want to minimize that. Do we want to make it so that bank failures don't occur?
(36:38)
I mean, just let that land a minute and think about what kind of risks that would mean for the financial system. What kinds of role for the government, what sort of power in the hands of bankers and politicians? I don't like that version of the American financial system. I want banks to be able to fail all the time and recognize that, okay, I've got a responsibility here to do some of my own vetting about my financial relationships because I've got some real skin in the game. But also recognition that sort of dynamism both on the government side and on the banking side is an important part of the American financial and political tradition. And so I would say that one thing that we can watch in the future is if a bank gets big, very, very fast, then we've got almost certainty that they are going to have some managerial and yes, some capital problems associated with that kind of growth. You don't get dropped a hundred billion dollars and suddenly no what to do with it all. But other than that, I say lead banks fail. And if we don't have a system that permits it, then we need a different system.
John Heltman (37:54):
One last only big goody with respect to this social media. Do you think that in the heat of it, there was this sort of perception that social media had fueled or sort of created conditions where, as you said, regulators were afraid of this being kind of a Lehman moment? And I know just personally, I was getting my hot water heater installed when all of this was going down, and my plumber who didn't know that I did bank regulation for a living, sent me a text, or he learned later during the course of that operation, he texted me later, said, Hey, you can answer this or not, but I got a bunch of money in Wells Fargo. Should I pull it out? What's the right call? And when it gets to your plumber, that's when you know that there's something real there. Is that something that warrants further discussion? Is there a kind of digital run kind of future that we're in right now that has a policy response?
Peter Conti-Brown (39:01):
So old school social network theory? Yes. Digital social media. I have not seen it. And certainly SVB was not that old school. Social networking, the idea that there might be correlated clusters of people as kind of textbook what happened to SVP, they had an idea that they were well diversified on their liability side when there was no such thing. Their entire families of companies that represented a single phone call or email or WhatsApp text that resulted in immediate withdrawal. And so having a more sophisticated sense of a social network analysis on the liability and asset side of a bank, I think is pretty desirable. So call some sociologists to who study this kind of thing into the supervisory team to get some better sense there. The evidence that I saw, there were a couple papers on this and I read them carefully. I'm completely unpersuaded that this was a Twitter run, that there was some sort of the victimization of social media hype because here's the reality.
(40:06)
Silicon Valley Bank failed because it had a terrible and rotten business model. It didn't fail because of a whispering campaign on Twitter or elsewhere. It failed because it could not redeem the liabilities that it had accepted or issued. And so I don't think we are in a world where we have digital runs, so to speak, and I don't think we should contort policy in order to prevent those things, which we have not yet seen. But the idea that there are some networks that give a sense of diversification on either the liability or asset side of a bank balance sheet without giving that reality, that's what happened in SVB. All right. And I think that's something that banks and supervisors should be taking seriously.
John Heltman (40:58):
Peter, professor Conti-Brown, really appreciate your making the time this morning. This has been a really fascinating discussion, and I thank you. And hopefully we won't do this again too soon, but if we have to, we will.
Peter Conti-Brown (41:15):
If we have to, we will, yep. Sounds great. Thank you so much, John.
John Heltman (41:18):
Thanks everybody.
